London's love affair with Saudi Aramco smacks of Brexit desperation | Nils Pratley

The timing of the Treasury’s loan guarantee for the state oil giant deepens a sense of grubby games being played

Saudi Aramco is worth somewhere between $1tn and $2tn, depending on whose estimate you prefer. In short, Saudi Arabia’s state-owned oil company is not short of a few dollars. Why on earth, then, would UK government think it necessary to offer Aramco a $2bn loan guarantee?

The official answer is that this is just business as usual. The UK Export Finance agency exists to promote UK exports by making our firms’ goods and services more competitive. The Saudis may not actually need a $2bn credit backstop but, hey, what’s the harm in giving them a prod to buy British? Politics in Saudi Arabia may be in a state of upheaval but Aramco is not the defaulting type.

Well, that’s one explanation. Another is that this is another sop to the Saudis to encourage them to list their oil company in London rather than New York, assuming an international flotation is still in prospect after the arrest of various princes, former ministers and tycoons last weekend.

The listing and loan guarantee are “totally separate,” insists the Treasury. That is becoming a well-used line. The Financial Conduct Authority argued similarly when its sudden interest in relaxing the rules on investor protections for state-owned firms to make it easier for them to secure a “premium” listing in London just happened to coincide with Aramco’s interest.

The UK’s love-in with Aramco smacks of desperation, born of the political desire to score a high-profile post-Brexit “win” for London. But some victories aren’t worth the price, as big fund management houses have been telling the FCA endlessly. Bending the rules on “premium” listings to accommodate Aramco risks long-term damage to the City’s reputation as a place where investors enjoy strong rights.

London shouldn’t need to lower governance standards, and the timing of the Treasury’s $2bn loan guarantee merely deepens the sense of grubby games being played.

Burberry boss’s first collection includes a profit warning

If you think £950 for a nylon rucksack is a little on the steep side, Burberry, maker of said item, has news for you: it’s going upmarket.

The new chief executive, Marco Gobbetti, wants the company to establish itself “firmly” in the luxury end of the fashion market, as opposed to paddling around in the shallows of “contemporary” luxury. By way of illustration, he said rivals can charge 50% more for a standard Oxford polo shirt. Get Burberry’s bargain versions – a snip at £150 – while you still can.

On paper, one can understand why Gobbetti is so keen to “sharpen our brand positioning” and “elevate leather goods.” Truly upmarket brands such as Gucci and Hermes are making a mint. Luxury handbag companies produce 26% operating profit margins, he said, while poor old Burberry currently runs on 17%.

Yet the shares fell 10%. It wasn’t Burberry’s shocking invention of new verbs (“we will wardrobe the customer” – what?) that frightened investors but the cost of Gobbetti’s overhaul. Capital expenditure will be cranked up. Sharpening the brand will also blunt revenues and profits in the short-term. Burberry, having just reported a 24% improvement in profits to £127m at the half-year stage, expects to go sideways for two years.

Once the group has reached Gobbetti’s promised land of “sustainable” returns, revenues will start growing again and there will be a “meaningful” improvement in profit margins. That’s the theory, anyway, but, as with all such reinventions, the short-term financial pain is certain but the eventual rewards are not. Mulberry, albeit on a smaller scale, once tried to boost its handbags into the price stratosphere and the strategy flopped.

Marco Gobbetti
Marco Gobbetti. Photograph:

Gobbetti brings a more experienced hand yet he still needs a chief designer to replace Christopher Bailey, who is leaving next year and wasn’t even given a walk-on role in Thursday’s City presentation. Bailey seems to be yesterday’s man already, which feels harsh – he wasn’t much cop as chief executive during his brief stint but he had previously hauled the brand out of the doldrums.

For better or worse, it’s the Gobbetti show now. His plan may come good eventually but let’s not miss the obvious: his first collection included a profits warning.

Why is Xavier Rolet leaving LSE? Soon we may know

It’s on: an extraordinary meeting of the shareholders of the London Stock Exchange Group to consider the motion that the chairman be unceremoniously dumped.

The Children’s Investment Fund (TCI), an activist investor with a 5% stake in the LSE, has lost patience. It wanted a straight explanation for why the LSE chief executive, Xavier Rolet, is leaving next year. It hasn’t got one, thus it is calling on all shareholders to vote to remove the chairman, Donald Brydon, and keep Rolet, assuming he’s willing to stay.

This is a fine feud and Brydon has played his hand badly. In today’s world, you simply can’t announce that a well-regarded chief executive is going but not tell shareholders why.

TCI claims Rolet was, in effect, sacked and has been prevented by confidentiality clauses from saying so. We don’t have Brydon’s version of events because neither he nor the LSE will speak. TCI’s method of forcing an answer is aggressive but the tactic is justified. The LSE’s failure to explain was glaring on day one. To maintain the deafening silence for three weeks is ridiculous.

• Follow Guardian Business on Twitter at @BusinessDesk, or sign up to the daily Business Today email here.


Nils Pratley

The GuardianTramp

Related Content

Article image
MPs to question City watchdog over Saudi Aramco float
FCA to detail whether or not it met ministers ahead of planned rule changes that could lure oil giant’s £1.5tn float to London

Jill Treanor

08, Sep, 2017 @7:37 AM

Article image
FCA's rule change to lure Saudi Aramco prompts criticism
Businesses object as regulator paves way for London to host oil giant’s flotation

Adam Vaughan

08, Jun, 2018 @3:03 PM

Article image
FCA must backtrack over Saudi oil giant Aramco | Nils Pratley
Plans to rewrite London listing rules to attract premium flotations leave a bad taste in the mouth

Nils Pratley

08, Sep, 2017 @6:22 AM

Article image
FCA met Saudi Aramco before trying to change rules for $2tn flotation
Regulator has attracted controversy by allegedly seeking to water down rules to lure Saudi oil giant’s IPO to London

Jill Treanor

13, Oct, 2017 @5:31 PM

Article image
Political uncertainty puts London listing for Saudi Aramco in doubt
Decision to rule out UK and Hong Kong would be major blow to both financial centres

Jillian Ambrose

29, Aug, 2019 @4:08 PM

Article image
UK denies $2bn Saudi Aramco loan deal is linked to any London listing
Treasury says loan guarantee is separate to any potential LSE listing and simply aims to help boost British firms export to oil-rich kingdom

Adam Vaughan

09, Nov, 2017 @4:35 PM

Article image
Post-Brexit London is open for business (no matter how grubby)
The City watchdog’s rewriting of the premium listing rules to accommodate a potential mega-listing in London of Aramco is deplorable

Nils Pratley

13, Jul, 2017 @10:57 PM

Article image
Saudi Aramco will soon be worth $2tn but it looks plainly overvalued | Nils Pratley
International investors doubting its true value are unlikely to be wowed by a stage-managed price inflation

Nils Pratley

11, Dec, 2019 @7:04 PM

Article image
May and LSE chief woo Saudi ministers for $2tn Aramco listing
UK prime minister and London Stock Exchange boss seek to win flotation of state oil company, likely to be largest of all time

Jessica Elgot in Riyadh

05, Apr, 2017 @9:44 AM

Article image
City regulator plans rule change to allow Saudi oil giant's $2tn float in London
As Aramco decides where to sell shares, FCA proposes controversial changes to pave way for LSE listing

Jill Treanor

13, Jul, 2017 @8:59 PM